The COVID-19 pandemic brought the treasury function onto the front lines, transforming its role from reporting to charting a course forward in the face of epoch-defining upheaval.
As net working capital (NWC) days reached a five-year-high, 2020 drove treasurers to seek short-term fixes to shore up cash and liquidity. Although government support and COVID-19 relief measures made for a slightly less bumpy 2021, these are now coming to an end – just as 2022 brings forth new challenges and opportunities.
As the situation before us continues to evolve, treasurers are being called upon once again to right the ship, focusing on efforts that support building long-term business resilience, while addressing tactical actions to help them navigate volatility in the short term.
Managing volatility in supply chains
The pandemic sounded the death knell for the highly-optimised ‘just-in-time’ supply chain model for certain industries as factory shutdowns and shipping delays made it difficult to secure some goods and parts. In the new ‘just-in-case’ era, companies are mitigating risk by building up their inventories and finding additional suppliers – but with shipping costs at record highs and surging costs for everything from oil to semiconductors, this has become an expensive endeavour.
“The past two years have been characterised by companies rethinking where to source their products and stocking up on inventory, which has resulted in lower efficiency and higher costs,” says Kai Fehr, Global Head of Trade and Working Capital. “With rallying commodity prices raising input prices, working capital drawdowns are increasing yet further, straining already stretched balance sheets.”
Working in concert with the inventory management function to drive enhancements, such as the optimisation of inventory levels per stock taking unit or the improvement of production process batch sizes, has been one way that treasurers have addressed this issue. Today, as a global shortage of raw materials leads to increased competition among buyers, securing supply while protecting their most vulnerable supply chain partners has become an important priority.
New strategies as the era of cheap cash draws to a close
Significant government support in some markets, as well as readily available debt, enabled certain corporates to sustain a relatively strong cash position despite external disruptions. But while borrowing remains cheap compared to historical levels, recent rises in interest rates as central banks seek to tighten pandemic-era monetary policy mean that corporates are losing the ability to access liquidity at lower costs.
For treasurers, this means finding new sources of liquidity – and with as much as EUR 5.5tn tied up globally in net working capital, according to PwC estimates1, the opportunity to release trapped cash from the balance sheet is becoming increasingly attractive. Lengthening days payables outstanding (DPO) to enable companies to hold onto cash for longer is an obvious option, but as the balance of power between buyers and suppliers has shifted, negotiating extended payment terms is meeting stronger resistance.
“Treasurers have become trusted advisors to the business, managing rising demands from suppliers while keeping payment structures and schedules realistic,” says Fehr. “For corporates, there is a clear opportunity to work with their banking partners to help their treasurers maximise their capacity to execute a solid working capital strategy.”
Average days sales outstanding (DSO) have risen steadily over the past five years, reaching a peak in the immediate wake of the pandemic. While many companies have modernised the credit-to-cash process to get cash in faster through invoice automation, there’s still room for improvement. “As pressure mounts to improve cash control and maintain essential cash reserves, days sales outstanding metrics can also be a valuable tool for corporates to monitor and track their clients’ payment patterns, providing an early warning of potential issues,” says Jia Yu Liao, Global Head of Working Capital. “By benchmarking their performance against others within their industry, corporates can gain important insights on potential areas of weakness and opportunities for improvements.”
The ESG imperative
Freeing up liquidity isn’t solely an exercise in survival. Beyond shoring up the balance sheet in the face of immediate risks, treasurers are also being called upon to deploy liquidity that can be directed towards strategic objectives, particularly those related to ESG. Greater enforcement of global standards and frameworks to monitor adherence to sustainable practices, as well as regulatory actions such as the Singapore Exchange’s mandatory climate reporting for listed business and the European Union (EU) proposal to impose a carbon tax on imports, are injecting increased urgency here, alongside growing calls from investors and consumers for companies to do better.
“Since 2021, shareholder activism has increased, including votes against directors for a lack of credible climate action plans, and this trend shows no sign of abating. While taking a more ambitious approach to ESG will require serious levels of investment, this can be achieved, at least in part, via working capital efficiencies,” says Liao.
In the fast-moving consumer goods (FMCG) industry alone, Standard Chartered research shows that if all corporates could align their overall cash conversion performance to that of the 80th percentile within the sector – a feasible target – the amount released would be as much as USD 80bn. To put that into perspective, for 20 of the sector’s largest corporates, this would be enough to meet 80% of the costs needed to achieve net zero.
The case for tech-driven visibility
To strike the right balance of measures, the treasury function needs to be fuelled by technology that can enable the identification of low-hanging fruit, while improving its ability to optimise working capital in the long term.
Corporates surveyed for Standard Chartered’s recent Critical Indicators of Sustainable Supply Chains report were unanimous in underscoring the importance of transparency and connectedness to their suppliers and buyers, but the majority expressed a shortfall between their objectives and performance on these metrics. Overall, four in five companies are already using technology and data solutions to some extent to address their supply chain optimisation challenges, but many are yet to harness more cutting-edge tools that facilitate tracking and tracing or even automation.
Our clients have reflected that the ability to not only measure the impact of their working capital optimisation strategy but also benchmark themselves against their peers will be an important enabler.
Where treasurers are concerned about the health of their balance sheets, limited visibility can become roadblocks to allow for proactive management and adjust strategies in an agile manner. “Our clients have reflected that the ability to not only measure the impact of their working capital optimisation strategy but also benchmark themselves against their peers will be an important enabler” says Liao. At a time when working capital performance can make or break a company, leveraging reliable analytics to pinpoint areas of weakness is crucial and timely intervention can be supported through increased transparency and data-driven insights.
Enabling a strategic treasury function
Given the uncertainty that continues to prevail, it makes sense for companies to focus on what they can control – and achieving this will require treasurers to take on an increased advisory role. Equipped with the information they need to confidently identify the right financial and operational levers to pull, treasurers can be their companies’ strongest asset as they move from reacting to prospering from the opportunity ahead. Standard Chartered has the tool and insights to help.
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